Rick Santelli has a Howard Beale Moment…

This is classic TV but Santelli isn’t saying anything I haven’t already heard before on CNBC and FBN. The only difference is the cheerleading from the peanut gallery behind Santelli. A pretty good cross section of America? Traders? Umm…talk about preaching to the choir and stacking the deck. Let’s see Santelli get that kind of response in some of the harder hit sections of our Economy…

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This entry was posted on February 19, 2009 at 10:19 am and is filed under CNBC . You can follow any responses to this entry through the RSS 2.0 feed.
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Santelli’s point was people were buying houses that they knew they couldn’t afford, but because of ridiculous laws passed by the Clinton administration, and total lack of oversight of the crooks running Fannie & Freddie, WE have to bail these people out.

Well intentioned and naive intervention in the mortgage market has the following unintended consequences.

Cram downs, forced lowering of the principal and below market interest rates raise the risk premium on future private lending. This raises the price of the mortgage to compensate the lender for possible future government imposed losses. This hurts all future borrowers. On the innocent people who had nothing to do with sub prime etc.

Government stats report that 55% of all re-priced distressed mortgages have re-defaulted in 6 months. Fundamentally, these people for one reason or another, not just unemployment are not suited or responsible enough to own a home. They just don’t have the commitment/motivation or recourses to continue paying a mortgage. The 55% that default cause the government to throw good money after bad. Billions!

I think Rick believes that the free market would better handle the problem. Natural foreclosure causes the banks to auction off the properties at fair market prices to people that will be responsible; it stops the cycle of foreclosure. In other words a bottom is established so that once again potential growth can start again with normal supply demand forces working again. Free markets cleanse the system, penalizing bad investments and rewarding good investments. It creates a rational incentive system that prevents exactly this type of problem in the future. (That’s if the Gov. stays out of the market by not subsidizing bad investments like sub-prime volume goals etc.) Let renters be renters! That is honorable.

The Government program creates a moral hazard. (Bad behavior) The government creates an unintended incentive for people to default. After all, if my neighbor can get government bailout help by running up debt and all types of unaffordable consumption why shouldn’t I do the same? This financial behavior has no penalty. Just the opposite, it is rewarded with subsidies that the responsible person is not offered. The responsible citizen, that lives with in their budget ends up paying (taxes) for the irresponsible citizen that has lived beyond their means. This ads insult to injury and destroys positive incentives.

The US housing market is just too big and to complicated for any government program to control or influence in a positive way. Any government program will only delay the natural OVERWHELMING supply and demand forces. The longer the delays in letting the markets work the more negative the unintended consequences and pent up imbalances. Inevitably all this deficit spending must be paid for in higher taxes or hyper inflation.

Do you really think that Fannie and Freddie brought the banks down?
Also, what specific laws forced banks to issue sub-prime mortages, leverage themselves to the moon and forced the ratings agencies to give these toxic assets triple A ratings?

L&J – we’re obviously not going to agree on this. The problem has spread beyond the ‘subprime’ loans into the general mortgage market. That is, the subprime meltdown caused the economy to crash which caused jobs to be lost which caused people who were perfectly responsible and credit-worthy to no longer be able to afford a mortgage.

People without jobs at all obviously aren’t going to be able to afford their mortgage, and as the market stands, they can’t sell it either. But people who go from two incomes to one or one and a half MIGHT, if they could get refinancing at the new lower rates. And as laws currently stand, if their mortgage is for more than the current value of their house, they can’t qualify for a new lower rate, even tho’ they could PAY it. And EVERYONE’s house is worth less now, because all the foreclosures are glutting the market.

If you can stem the tide of foreclosures, falling house prices bottom out and potentially rise again (although not to the insane levels we were seeing several years ago – not right away anyway.)

Everything is interconnected – everything has to start working again at the same time.

Thanks Art. I’m not good at detailed financial discussions. I think your presentation was a fair assessment of the situation. The concept of blindly letting the “free market” sort everything out is simplistic and borderline immoral.

“If you can stem the tide of foreclosures, falling house prices bottom out and potentially rise again (although not to the insane levels we were seeing several years ago – not right away anyway.)

Everything is interconnected – everything has to start working again at the same time.””

The above we agree on. My point is only real economic growth will stem the tide. Obama has not done one thing to create incentives for economic growth. Joe says I’m repetitive so I wont repeat all the posts that suggest tried and true policies that would turn things around, create jobs. Unfortunately, the stimulus bill is just a big social welfare package that even the non partisan congressional budget offices says will reduce GDP in the next 5 years. If you don’t believe me, google it.

“The concept of blindly letting the “free market” sort everything out is simplistic and borderline immoral.’

The free market is the ”the invisable hand’ It demonstrates that society benefits greatly “GDP and wealth distribution” when people are left alone to act in there own best interest. Every transaction benefits the buyer and the seller. see the great economic thinker Adam smith for more on how it works.

Socialism and communisim are immoral. Millions have starved to death in the name of the common good. Why must we repeat historys mistakes regarding socialism? If it worked I would be all for it!

There’s a middle ground between completely free markets and complete socialism. This is the ground the Democratic Party is based on. The mistake conservatives make is to assume that SOME regulation and support of markets is a slippery slope leading to socialism, when its motive is to be exactly what it is: SOME regulation and support. Completely free markets and trade, with no regulation, leads to a small upper class and a vast lower class with nothing in the middle. It doesn’t work.

By the way, L&J, you can voice your opinion all you want. My criticism was when you would kind of jump off a topic to state your creedo. Everything you’ve talked about here has directly related to what Santelli said. Repeat away baby!

BL, the Community Reinvestment Act played a role in the mortgage meltdown, as did Fannie & Freddie.

And Joe, the Republicans held hearings and spoke out that there should be MORE regulation of Fannie & Freddie…but the Dems vehemently opposed it, and blabbed about what a great job Franklin Raines was doing running Fannie Mae (into the ground).

He cooked the books and ran off with $90 million, the banks lent money to a bunch of people who could never pay it back, the Dems were getting tons of cash from Fannie & Freddie…..and we’re now in this mess.

Government screwed it up….and now government is claiming to be the heroes, trying to clean it up.

Of course, everyone on the left will blame Bush. He should’ve forced tougher oversight on Fannie & Freddie…but there’s TONS of blame to go around.

The free market is the ”the invisable hand’ It demonstrates that society benefits greatly “GDP and wealth distribution” when people are left alone to act in there own best interest. Every transaction benefits the buyer and the seller. see the great economic thinker Adam smith for more on how it works.

“The Tragedy of the Commons” is an influential article written by Garrett Hardin and first published in the journal Science in 1968.[1] The article describes a dilemma in which multiple individuals acting independently in their own self-interest can ultimately destroy a shared limited resource even where it is clear that it is not in anyone’s long term interest for this to happen.

Central to Hardin’s article is a metaphor of herders sharing a common parcel of land (the commons), on which they are all entitled to let their cows graze. In Hardin’s view, it is in each herder’s interest to put as many cows as possible onto the land, even if the commons is damaged as a result. The herder receives all of the benefits from the additional cows, while the damage to the commons is shared by the entire group. If all herders make this individually rational decision, however, the commons is destroyed and all herders suffer.

Socialism and communisim are immoral.

This is simply meaningless. You might as well say they are fleem.

You are arguing from a false dichotomy, that there are only two possible answers, unfettered free markets and communism. In fact, there’s a very broad spectrum of societies possible between those two extremes, and believe me, you really wouldn’t like to live in a completely unfettered free market society. Porn, guns and drugs? think about it.

bigred – I fully agree that there is a lot of blame to go around, including a lot of Democrats and Fannie and Freddie. No doubt about that.
This is not a partisan problem – both sides bear responsibility. However, reducing it to “Feddie and Frannie did this” and “Bill Clinton did that” is absurd and conducting a partisan food fight is not going to get us out of this.

Bottom line – the bi-partisan government screwed up, the banks screwed up, the mortage/financing companies screwed up, the ratings agencies screwed up, and a lot of people (home buyers) took risks they should never have taken all for the short-term benefit.

The markets would go up 3000 point, credit markets, consumer confidence would return, GDP would start to grow and happy days would be here again if the Administration made the following pronouncements tomorrow

In principal
1. The Administration believes in free markets and that free market solutions will get us out of this recession if we let the markets work. Profit is a good thing and makes our markets and system work. Profits provide jobs and tax revenue, the administration starting today supports profitable companies’ efforts to increase profits by providing tax incentives to invest and increase more efficient plant and equipment capital.
2. The administration will utilize a proven plan used during the 1980’s (RTC) to acquire and dispose of insolvent banks quickly. Stripping out the problem loans and then auctioning off the resulting good bank to other more profitable regional banks that never got into this trouble. (like Northern Rock) As with the RTC, the bad assets will be consolidated and then auctioned off to the highest bidders, freeing up capital and putting these assets to work again. This will create incentives for winners and losers and get the system functioning again.
3. For capitalism and free markets to work investors must be allowed to fail as well as succeed. In accordance with true free markets bond holders and equity holders of insolvent banks and failed companies will unfortunately not be compensated for losses and the risk they knowingly took on when they made these investments. This serves as a reward as well as a stick for prudent investment practices.
4. The Administration announces a proposal; for a 15% across the board permanent tax cut on all income taxes and capital gains. The admisntration believes in the power of free markets and seeks to reward investment and accelerated economic activity that this tax cut will incentivize. Permanent tax cuts have a clear history of jumpstarting sustained economic growth, 1960, 1980, 2000.
5. Recognizing that necessary economic adjustments will cause dislocation of workers jobs in the process known as ‘creative destruction’ the administration will extend unemployment insurance and other safety net programs to all unemployed workers for an additional 18 months.
6. The Administration will double the size of the SEC and strictly enforce antitrust and consumer protection laws The Administration will not interfere with management decisions of the private enterprise system. Nor will the administration support the implementation of regulations that force or incentivize business to make poor decisions such as the offering of subprime loans.
The American free market system has produced the world’s largest most productive economy the world has ever known. The administration will endeavor to restore free market principles, thrift and traditional American free enterprise in its economic policy. Although adjustments are sometimes painful they are necessary if markets are allowed to work. Minimum interference will produce the greatest amount of prosperity for the greatest number of people.